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Hitting Debt Ceiling Could Create Recession ‘More Severe Than Any Seen Since The Great Depression’

By Annie-Rose Strasser on October 3, 2013 at 11:34 am

"Hitting Debt Ceiling Could Create Recession ‘More Severe Than Any Seen Since The Great Depression’"

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Burning Money

Fresh off the heels of Rep. Steve King (R-IA) downplaying the effects of exceeding the country’s debt limit, the Treasury Department on Thursday released a report warning of the dire economic consequences that could come from Congress failing to reach an agreement not just on funding the country’s government, but on paying the country’s outstanding bills.

As the fight over the shutdown drags on, it’s becoming increasingly likely that House Republicans will wrap a bill approving a increase in the debt ceiling — the limit on how much the government can borrow to pay its bills — into their negotiations over funding the government.

On Thursday, the Treasury report warned against “brinksmanship” when it comes to paying off the United States’ debt. “Unprecedented default could result in recession comparable to or worse than 2008 financial crisis,” the report says. Later, its authors warn that default could create “a recession more severe than any seen since the Great Depression.”

The report draws many of its lessons from the 2011 standoff over the debt ceiling and the impacts it had on the market: “consumer and business confidence fell sharply, and financial markets went through stress and job growth slowed,” the authors point out. “U.S. government debt was downgraded, the stock market fell, measures of volatility jumped, and credit risk spreads widened noticeably; these financial market effects persisted for months.”

The standoff affected household wealth, too, which fell a total of $2.4 trillion between the second and third quarter of 2011. Retirement assets also plummeted by $800 billion, and mortgages took a hit. “For an average mortgage of $235,000 at that time,” the authors write, homeowners saw as much as an “increase [in] monthly payments by about $100 per month.”

There’s no reason to think a standoff over the debt ceiling in 2013 would bring anything different. House Republicans have steadfastly refused to fund the government at all unless the president repeals his signature legislation, the Affordable Care Act. They will only find consolidated power when the U.S. reaches its debt limit.

But the Treasury department believes members of Congress need to tread carefully in the coming weeks. If not, they say, the economic impact could last much, much longer.

“Considering the experience of countries around that world that have defaulted on their debt,” the report’s authors write, “not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.”

In the past, the debt ceiling was raised as a matter of course, including seven times under President George W. Bush. Even House Speaker John Boehner (R-OH) used to recognize the danger of failing to raise the ceiling, claiming multiple times that he wouldn’t use it for leverage.

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